Fima Corporation Berhad (Bursa: 3107) is an investment holding company with three divisions: plantation, manufacturing, and property management. The plantation division is engaged in the development, cultivation and management of oil palm estates as well as the processing of oil palm products. The manufacturing division is involved in the production of security and confidential documents (e.g. travel documents, certificates, licenses, etc.). Lastly, the property management division offers property management, cleaning, mechanical, and electrical services of commercial properties.
While Fima’s revenue remained relatively flat at RM372.1 million for FY2017, its profit before tax fell 20.7% from RM77.3 million to RM61.3 million. This was mainly due to the RM29.4 million impairment loss on property, plant and machinery and biological assets in Fima’s Indonesian plantation subsidiary, PT Nunukan Jaya Lestari (PTNJL). The impairment is due to the Indonesian government’s decision to revoke one of PTNJL’s land titles, affecting 57% of its planted area. Although PTNJL is in the midst of appealing the decision, it has decided to recognise the impairment losses upfront.
We attended the Fima AGM to find out more how the impact of this case would affect the company’s business performance moving forward, and the management’s plan to overcome the setback.
Here are seven things we learned from the 2017 Fima Corporation AGM:
1. Fima’s total revenue decreased 0.8% year-on-year from RM375.2 million to RM372.1 million. This was mainly due to a drop in revenue from the manufacturing and property management divisions. This was offset by higher revenue from the plantation division due to higher prices for oil palm fresh fruit bunches, crude palm oil and crude palm kernel oil because of a prolonged drought caused by El Niño. This resulted in a reduction in supply, raising the average crude palm oil price from RM2,064 per metric tonne in 2016 to RM2,625 per metric tonne in 2017.
2. Profit before tax from Fima’s manufacturing division increased 10.4% year-on-year to RM59.6 million. Profit before tax from the plantation division increased 34.8% to RM28.7 million, however, due to the impairment it recorded a loss of RM0.7 million. The property management also recorded a loss of RM0.3 million. Due to the losses suffered by these two divisions, manufacturing comprised 97.2% of Fima’s total profit before tax in 2017.
3. In the Chairman’s Statement, the decision to revoke PTNJL’s land title was due to administrative irregularities in 2003.
“On 26 August 2016, we announced that vide a letter dated 25 July 2016 to PTNJL (which PTNJL received on 23 August 2016) the Menteri Agraria dan Tata Ruang/Kepala Badan Pertanahan Nasional issued an order to revoke PTNJL’s land title Hak Guna Usaha No. 01/Nunukan Barat (“HGU”) (“Ministerial Order”) with immediate effect, on the basis that the HGU was improperly issued due to administrative irregularities performed by certain officers of the Badan Pertanahan Nasional Provinsi Kalimantan Timur at the time of the issuance of the HGU in 2003; resulting in parts of the area within the HGU to overlap with forestry zones.”
PTNJL then sought to annul the Ministerial Order which was subsequently dismissed.
“On 21 October 2016, we announced that PTNJL filed an application in the Pengadilan Tata Usaha Negara (“State Administrative Court”) in Jakarta, Indonesia seeking an order to annul the Ministerial Order. The application was dismissed by the State Administrative Court on 13 June 2017.”
In the meantime, PTNJL has filed an appealed and continues to operate its plantations there.
“On 21 June 2017, PTNJL filed a Statement of Appeal to the Pengadilan Tinggi Tata Usaha Negara (“Court of Appeal”) to appeal against the decision of the State Administrative Court. Notwithstanding the Ministerial Order, we also disclosed that the local government in Kabupaten Nunukan has given its undertaking and allowed PTNJL to continue to lawfully operate its plantation operations until the final determination of the suit by the Indonesian courts.”
The outcome of the appeal is uncertain and beyond the control of Fima; it is very possible that it may not be able to recover the impairment loss related to the affected area.
4. One shareholder asked whether Fima plans to take legal action against the Indonesia government if it loses its appeal since this was caused by the administrative irregularities between the local and federal authorities. The management answered they will ask for a reinstatement of the planted area but will not demand any compensation or damages.
5. Another shareholder asked why the impairment amount stated in the Independent Auditors’ Report was RM44.7 million instead of RM29.4 million. The management explained that RM29.4 million is the actual amount allocated for the impairment. The difference of RM15.3 million is due to asset appreciation during revaluation. The management added that the impairment will not affect cash flow and would not be a major issue if PTNJL loses the appeal.
6. A shareholder asked if the management had any contingency plans for the plantation division and its impact on Fima’s revenue and profit if it losses the appeal. The management shared that the plantation division is actively sourcing for strategic plantation land banks in both Malaysia and Indonesia. Moving forward, the management will do a rigorous study of the both local and federal authority regulations before they acquire land in Indonesia to avoid any administrative irregularities in the future. The management also plans to acquire more land banks in the east coast of Malaysia in states like Kelantan and Terengganu. Their strategy is to acquire smaller estates (i.e. 500-1,000 hectares) as the big players are not interested in the smaller plantation sizes. When the accumulated land size is large enough (4,000-5,000 hectares), they will build a mill. For instance, Fima has steadily acquired a 3,440-hectare plantation in Malaysia over the past three years. To date, they have successfully planted 1,100 hectares and expect an upward trend in oil palm production as more young oil palms mature in Malaysia.
7. A shareholder highlighted that Fima’s return on equity (ROE) and return on average capital employed (ROCE) has declined for the past three years. He asked about the management’s plans to improve the figures. The management explained that the decline in the last three years was due to higher direct costs and an unfavourable sales mix. However, the ROE and ROCE for the 2016/17 financial year would have been 12% higher compared to 2015/16 if they excluded the impairment loss.
The fifth perspective
Most shareholders posted questions related to the PTNJL issue as many were concerned about the future earnings of the plantation division should it lose the appeal. It’s an unfortunate event beyond the management’s control which they didn’t expect. Nevertheless, the management looks to be putting in their best efforts to save the situation and has taken the decision to mitigate its impact by registering the maximum impairment loss amount upfront.
With additional article contributions by Mitra Chen.
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